There was plenty of other great material, so we wanted to provide
the Q&A in its entirety.

Here's a lightly edited transcript of our full conversation:

Business
Insider: What was it like being CEO of a big hospital when a
law changed your entire industry?

Dr. Cosgrove: The law has changed the industry
completely, and I think the entire health care industry is
anxious at this point, the anxiety is palpable. We're in an
enormous period of change, and I think that period of change
gives us tremendous opportunity. You've seen by the recent
shout-outs we got in the presidential debates that we're being
looked at a model as how to go forward, and I really think our
model is our secret sauce.

What is it about the model that's made you
successful?

I think that there are a number of things that allow us to change
as we need to. First of all, we're a medical group, we're
physician- led, we make our decisions about how we're going to
rule ourselves, what sort of facilities we're going to do, etc.
The second thing is that all the physicians are salaried. We have
no financial incentives to do more or to do less. We just try to
look after what the needs are for a patient because it doesn't
make a difference to us personally. The third thing is that we
all have one year contracts, there's no tenure, and we have
annual professional reviews. I don't know of another institution
that has annual professional reviews and one year contracts. In
the annual professional review we go over all individuals'
contributions to the organization and that contributes to our
decisions about what we do about salary and whether we reappoint
or don't.

I've had 37, by the way, 37 one-year contracts.

Do people find that nerve wracking and do they
adapt?

No, I think people adapt quickly. You stop and think, almost
every major business I can think of has annual reviews. And
health care traditionally has not. You got privileges at a
hospital and they were yours for life unless you committed murder
or something. So, very seldom do people look at the qualities and
the outcomes for the individual.

A lot of the provisions of the Affordable Care Act aren't
in place yet, have you made changes in advance?

Well we've really been thinking that this is coming for a very
long time. Even before the health care act was enacted we began
to see the changes in health care. We thought, we're going to be
under significant financial pressure and that health care has to
change, and I think that's probably a point that's worth making
with you. I think frankly there are huge changes that are going
on in the health care business right now.

One of those is the consolidation of providers, and by
consolidation of providers I mean that hospitals are coming
together in systems, right now we're talking to three facilities
in our immediate area about potentially joining the Cleveland
Clinic. Hospitals are coming together in systems and the systems
are beginning to talk to systems, and if you stop and think about
it, industry in the United States, particularly low margin
businesses and health care is clearly a low margin business, and
you figure that 25 percent of the hospitals right now are in the
red, so very low margin. If you look at what happened in
airlines, what happened in supermarkets, what happened in
bookstores etc., they all consolidated, they brought scale so
they could drive efficiency, I think that's what's happening in
health care right now.

Just because of the nature of the business, do you think
that's going to be more difficult?

It's going to be more difficult because of the nature of the
business, but I think that the financial pressures of the
Affordable Care Act is going to drive this increasingly. You see
the for profits for example, HCA has 160 hospitals, Community
Health System has 136 hospitals, Tenet has 60 hospitals, the
Catholics now are coming together and putting together big
systems across the country. 60 percent of the hospitals now are
part of a system, systems are talking to systems, we're talking
to other systems and I think you're going to see an increasing
amount of consolidation, and I think the reasons are pretty
clear.

If you look at the back office, what it takes to drive a hospital
now or even a doctor's office, the IT, the contracting, the
purchasing etc. you get advantages from scale, I think that's
going to happen and I think, if you look at the consolidation, it
was big news when the airlines started to consolidate. This is a
much bigger industry.

Especially in terms of employment, right?

I mean, its 24 percent of the federal budget, this is a huge
industry. After restaurants and hospitality, this is the biggest
industry in the United States. And so we'll start to see
consolidation and it's big business news. And the other thing
that will consolidate is providers, in the past most docs were
sort of independent physicians who practiced either with two or
three other guys or in small groups.

What you're seeing now is that hospitals are coming together and
docs are joining hospitals. Now 60 percent of the doctors in the
United States are salaried, and we get inquiries every day from
somebody who wants to come and join us. Simply put, the dynamics
are driving it, because it's so complicated to do it in private
practice. Think about the explosion of knowledge there's been in
health care. Can you imagine trying to scrounge everything, all
the knowledge there was in oncology without colleagues? So docs
don't want to practice by themselves anymore, they simply can't
scrounge all of the knowledge, so they're looking to team up with
other people to do it.

That's true even in specialties?

The example I always use is myself. I started out as a chest
surgeon. I used to do esophagus, lungs, coronary bypasses, aortic
aneurysms, and valve surgery. Now you have doctors who just do
esophageal surgery or lung surgery, I did just valve surgery by
the end of my career. The knowledge and the expertise needed has
gotten so big that you've got to narrow your field.

Why is the pace of innovation so slow, if what you've
done at the Cleveland Clinic's been so successful?

I have to tell you a cute story that I think speaks to your
point. About two years ago, I was invited to the White House and
I'm there with nine other CEOs of hospital systems, you know
there's Columbia, the New York hospital system, Penn — hospital
CEOs from all over the place. Everybody's given three or four
minutes to tell their story of what they can do to improve health
care delivery. I'm the last guy to talk and I described our
system, how we're integrated and how we're all employed etc. And
everybody says "Oh we couldn't do that." I said "wait a minute
guys. How many of you would like to have that system?" Everybody
raised their hand.

So the point is that we're entrenched in a different system and
we're going from an individual sport to a team sport, Getting
everybody to change their head space is a big deal. And I think
we're getting there now. Particularly because docs coming out of
medical school, they want to be employed, they want to work for a
big organization. 75 percent of them want to be salaried and as
that changes, the individual entrepreneur doctor is going to be
part of a system.

I think the pendulum is moving fast, it's really amazing how fast
things are changing.

What was the particular change that your doctors and
organization were most resistant to?

Most hospitals are organized around the department of surgery,
the department of medicine, the department of pediatrics — there
was essentially a guild system for whatever your profession was.
And what we said is, wouldn't it be nice to organize a hospital
around what a patient needs? Novel idea, have a hospital
organized around patients. If you've got a headache you don't
know whether you need to see a psychologist, a neurologist, or a
neurosurgeon. So let's put everybody who deals with a neurology
system in a neurological institute, and we'll have one head. So
if you go in for your headache, you can see whomever, right in
that one location. Everybody whom you could potentially need to
see is right there in one location and they talk to each
other, they're physically proximate to each other.

As opposed to bouncing around from department to
department?

Right. So what happened out of this is, I went to the Head of
Surgery and the Head of Medicine, and I said that I think
we need to change the system so we're organized around organ
systems, so we've got somebody in cardiovascular, head and neck,
neurologic, we put dermatology and plastic surgery together
because they deal with the skin, urologists and neurologists
together in the urological institute. So you guys are out of a
job. There's going to be no Chief Of Medicine and no Chief of
Surgery anymore. They said ok, we agree. I told them that they
were great guys and that there was going to be a place in the
organization for them and that they'd have an important
leadership job, but that we were going to do away with those
jobs.

So the whole organization was anxious, and we stared one by one
to move people to various locations, and finally everybody was so
nervous that we said we're just going to do the whole thing. In
one year we changed the whole organization, so there's no more
department of surgery, no more department of medicine, it's all
by institutes.

And I think that's an example not of beating guys over the head,
this was an example of, nobody came to me and said that's a
terrible idea not one person but everybody was anxious. And
nobody not one person has come to me and said we have to go back.

So everybody could see the value of doing it, but it created
tremendous anxiety.

How did you change when you transitioned from being a
surgeon to a CEO?

I had to change my clothes. I had to go out and buy a suit. I had
to go from surgical scrubs to suits and ties, it was very
expensive. Anyhow, everything in my life changed. I changed where
I lived, I went from the operating room where I used to spend 12
hours a day to the boardroom. I changed who I talked to, it was
not patients anymore it was whole constituencies of people.

And I had to change what I read, I went from the New England
Journal of Medicine to the Harvard Business Review. But the
biggest change of all was the change in the immediacy of
decisions. I made a decision in the operating room, and you know
right away if it was a good decision or a bad decision. Now you
make a decision and you may find out two years later. So I had to
learn to live with ambiguity better than I had in the past.

It was also a huge change in my personal and public persona. I
used to go places for a dinner party with my wife and people
would say "Oh, you're Anita Cosgrove's husband." Now you know I
remember that this struck me instantly, right after it was
announced I went to buy a Christmas present, and by the time I
got from picking it up to paying for it and getting out of there
I got stopped four times. Somebody wanted a job, somebody wanted
to complain, somebody wanted to thank me, somebody wanted to
congratulate me. I'd go to a basketball game and I'm busted for
eating a hot dog and they blog about it. I became a very public
figure which was a big change.

So I don't go to any restaurants in Cleveland without talking to
three or four people.

I know you have a system that helps doctors patent their
inventions, could you tell me a bit more about that?

It's a very long journey actually. The journey started when, in
my first five years at the Clinic which was 30 years ago now, I
developed with another guy a closed loop system for giving a
drug. So, we essentially learned about how to keep a patient's
blood pressure at a certain level by putting a drug in. We
developed it, we found a patent lawyer to do it, I negotiated
with companies and convinced a company to manufacture it, put
together a payment program, and one day I walked in and gave the
CEO a check for 50 grand. That was more than my salary at the
time, I thought it was a really big deal.

And he said, "Jeez, we could make some money out of this," and I
said, "Yeah, we probably could." We started out at that point
with a guy named David Morganthaler, who was one of the original
venture capitalists with Morganthaler Partners and was on the
board, and we started to vet all of the stuff that doctors would
suggest. For 20 years we couldn't quite get it right.

About 10 years ago we put a bit more emphasis on it and went out
and hired a guy by the name of Chris Colburn and he's really
developed the tech transfer arm of the Cleveland Clinic. We own
all of our intellectual property, all of my patents and devices
are owned by the Clinic. So he is charged with taking the tech
that the doctors think about and develop with the Clinic and
commercializing it. That may be licensing, that may be a startup,
and so on. In the last 10 or 12 years we have gotten almost
500 patents, another 1400 filed for, and 52 companies spun out.

Now the interesting sort of validation of this idea was that
other people have started to realize how hard this is to do. You
have to get the lawyers, the financing, the vetting figured out,
you have to figure out how to do negotiations with business and
so on. That's not stuff that comes naturally to a doc.
They're now bringing the model to other institutions. Long Island
Jewish signed up, Medstar in Washington has signed up, Ohio State
has signed up, Notre Dame signed up, and there are about six
others that have signed up.

They've decided to essentially rent rather than build, and we do
the tech transfer for those orgs. Medstar is a great example. The
year before we started representing them, they had no disclosures
of potential ideas from their staff, the next year they had more
than 100. They're getting their first patents and starting to get
their first set of royalties. So it works. It's been a very long,
painful process and it's taken a lot of failures to get this set
up, but now we have something that works for us and works for
other people as well.

You mentioned, in reference to the Affordable Care Act
that those cost pressures are going to drive consolidation.
Usually when we talk about cost pressures in business it's with
horror in our voices. But it sounds like, if it drives towards
more efficiency, it might be a net positive in this
case?

I think that's a very good observation and it probably could be a
net positive. We're really moving to trying and drive value, and
as you know, value comes from measuring quality and cost. We
haven't had very good measurements of either one of those in the
past. On the quality thing, we really started measuring quality
in cardiac surgery 30 years ago or more and that was pretty easy
because people either did or didn't, they walked out or got
carried out. So the endpoints were pretty easy, but what we found
out as we measured it, is that the more we measured the more we
found problems. And when you found a problem you could really
sort of screw down into it and find out what the root of it was,
and begin to deal with that particular issue. And what resulted
is that we got better and better as we went along.

So then we did the same thing starting 8 years ago for each one
of our institutes, saying that now you have to start to make your
costs transparent and measurable. So now each one of our
institutes has an outcomes book, it's on the web. Each year
they've gotten a little bit better in what they report and the
sophistication of what they report. Each year they're able to
look at their own results and say, we can do better.

On the cost end of things, it's a lot easier to measure dollars
than it is outcomes, but cost has almost been looked at as what
you get paid to do something, not what it costs to do it. Over
the years we've begun to understand how much it costs to do each
one of our procedures. For example, we've asked each of our
institutes to go and look at the cost of their number one, or
two, or three thing that they do. The urologists looked at
prostetectomies, they looked at the cost of the sutures, how many
instruments they had on the table, how long the patients stay in
the recovery room, etc. and they were able to take 25 percent out
of the actual cost of what they did. We did the same thing for
cardiac surgery, did the same thing for liver transplants, and so
on.

So now that we really have a capacity to look at each one of the
issues and how much it costs, we're able to really begin to
reduce the costs and we have to do that as an industry, just
because of the importance of that for the United States.

And if we don't, we're not going to be able to avoid the
financial problems that we have as far as debt is concerned
unless we control health care costs.

Increasing costs are sort of a demographic inevitability,
right?

It's interesting, I looked at a graph the other day of about 6
countries around the world. Every one of their curves of cost
escalation mimics ours. They're all advancing faster than GDP is,
they're all going faster than the increase in salaries. So
everybody's got the same problem. They may start from a lower
level, but they're all headed in the same direction. It's
demographics, and its also, think about what we can do now that
we couldn't 50 years ago. That's not free.

I think there are two aspects to this, and I don't think we've
really put our emphasis on exactly the right things. Really
everything we talked about is making the delivery of care to sick
people more efficient. Consolidating hospitals, buying better,
avoiding waste, all that sort of stuff.

The only other way we're going to be able to reduce the cost is
by reducing chronic illness. And that's smoking, that's obesity.
Obesity now accounts for 10 percent of health care costs and will
go to 20 percent over the next 10 years. We're not going to
control costs unless we deal with that.

If you could go back to the beginning of your tenure,
what would you do differently?

"I was incredibly naive when I started. The funniest part of
my naïveté is when I stood up in my first speech to the
Clinic, and I said that I thought the most important asset to the
Cleveland Clinic was all of you employees, that we had to take
good care of you, and we had to get you good food, even if that
meant we had to get rid of the McDonald's. That
precipitated a huge fight with McDonald's, it resulted in me
being on the front page of the Washington
Post above the fold being referred to as the "big mac
attacker." It gets even funnier in retrospect, at the time it
wasn't very funny at all.

So I didn't realize that the franchise for the Cleveland Clinic
had a very long contract and this became a very public fight, so
I decided that we had to have some sort of reconciliation. I was
introduced through a mutual friend to the chairman of the board
at McDonald's.

So I went out to Hamburger University in Chicago to
talk with them, I walk in to this conference room and there's the
CEO, the chairman of the board, the head chef with his hat, about
10 people, and me! And they said, "Well Dr. Cosgrove, what can we
do for you?" And I say, "Well, you seem like very nice people,
and you obviously have a lot of great stores all over the place,
and I'd love to have you at the Cleveland Clinic, if you'd just
get rid of the Big Mac and the French Fries."

Well, you should have seen the expressions on their faces.

We ended up having a serious discussion of trans fats, they
were in the process of taking the trans fats out of their fried
foods and the french fries, which they've subsequently completely
done. They took the cheeseburger out of our cafeterias, they
brought in apple slices and they changed the advertising, so we
made some progress and we probably added our voice to changing
McDonald's in a good way in the right direction

But I don't think knowing what I know now that I would do that
again.

What about the idea that we're going to have a shortage
of doctors?

I don't there's a question that there aren't going to be enough
docs. We're going to have to employ people like physician's
assistants and nurse clinicians who work to the top of their
licenses. And we're going to have to figure out how to make docs
more efficient in the way they see people. We've done this, for
example, with group visits where you can see 10 people with the
same problem at the same time so you don't have to repeat the
advice to a diabetic 10 times; you can do it all at once the
patients love it, the doctors like it, and for a long time we've
had doctors supported by nurse clinicians and PAs.

We have about 80 physician extenders in cardiac surgery alone,
and they allow for really great practices. For example, they
allow the surgeon to stay in the operating room. Instead of
running all over the hospital finding x-rays, taking out
stitches, pulling out chest tubes, and changing dressings, you
get to spend your time where it really counts, in the operating
room and they do the other things. It's great for the surgeon,
it's also great for the patient because [the assistants] know
exactly how I want it done and they do it time after time after
time that way because that's their job. And as a result, the
patient gets better care. So it improves the quality of the care.
We're going to see more and more of that.

I think we're going to see more virtual visits come in,
tele-health being employed because there's not going to be a
primary care physician in "East Overshoot." That's not going to
be big enough. So there'll be some sort of way that you can
connect with either a medical center or caregiver some place to
get that sort of advice.

Right now, we think everybody needs to see a doctor every time.
We've got nurses at CVS in the
Cleveland area and they have 450 or 470 where they do that. I
talked to the CEO of Walgreens
the other day and they have 8,000 facilities across the United
States, their pharmacists have come out from behind the counter,
they're now giving flu shots. I think that you're going to see a
disruption in the primary care from those locations.

That's where the next disruption health care is going to
come from?

Disruption always starts at the bottom end of the food chain.
Look at the mini mills that started doing rebar. Honda started
making motor cycles, then cheap cars, then very sophisticated
cars, Clay Christensen talks about that all the time, disruption
starts where you don't expect to see it, at the low end of
things.

I think that's going to happen in health care and I've been
looking for it. Disruption is going to happen at the pharmacy
rather than the teaching hospital. It's going to be hard to
change heart surgery or neurosurgery very fast. But you can
change that primary care stage, and you're going to be able to do
more and more things at that primary care level as you disperse
the care to where the population is.

The other thing while we're talking about this is really the
question of access. And you stop and think about what they talk
about in Washington about access, it's about insurance. That's
not actually getting in to see somebody to look after you. What
access is, is getting in to see somebody.

Over time, what we have done is we've increased our ability to be
responsive to demands for access. The first thing we did is have
a nurse on call so if your kid gets a fever of 103 in the middle
of the night, you can call our nurse on call and get advice, and
they have a whole protocol for various things. The second thing
we learned was from a patient who called up for an appointment to
see a urologist and got one in two weeks. It turns out the
patient was in acute urinary retention and couldn't pee and
needed to be seen right away. What we learned from that is when a
patient calls up for an appointment, you don't know what they've
got. And so we ask them all, would you like to, or do you
need to, be seen today? And so we put a same-day access
policy across our entire organizations.

So last year we saw 1 million same-day appointments, and 98
percent of the people who asked for a same-day appointment got
one. Then we went to our emergency rooms. Emergency rooms are
traditionally known for making you wait forever. Our waiting time
on average across all of our hospitals is 20 minutes and we did
that by changing how you entered.

When people came into an emergency room, they all used to get
treated the same way. You'd take your clothes off and get in bed.
A lot of people would walk in and say I've got a sore throat or
I've got wax in my ear or something like that. What we do is say,
"OK, you go over here and sit in this chair and we'll do the
throat swab or clean your ear out and you're gone." And the
people who come in and say "I'm having a heart attack" or I'm
coughing up blood," they get in bed. So the time from the door to
the doctor has been compressed.

Another big trend in health care is our aging population,
how do we address that?

First of all, the diseases have changed. If you look at the top
causes of death in the United States, six out of the seven are
chronic diseases. Chronic diseases are not going to be taken care
of in a hospital. They're going to be taken care of as
outpatients or through home care. We've done two things in that
respect. Last year we added three more outpatient facilities,
we're not building more hospital beds, we're building outpatient
facilities to take care of the chronic diseases. The second thing
is that we've vastly increased our home care. Increasingly we've
gone from hospice in-facility to hospice at home, and added more
and more home care, and we're able to do more and more things.

Another issue is people who get readmitted. They leave the
hospital, then they go to the nursing home and so we are now
moving into increasing our concentration on interfacing with our
nursing homes. We're selecting a few nursing homes and sending
our patients there, and having our doctors visit them and bring
the electronic medical record there so we have continuous care.

There are two things that happen there. One it'll reduce the
readmissions that come back from the nursing homes because they
haven't been looked after, and the second thing it'll do,
traditionally, people went to the nursing home and stayed 29 days
whether they needed it or not. Now we'll get them out of there
sooner, which will reduce the cost cycle.

What would you like to see next from Washington?

I'd like to see more emphasis on wellness. And that's a really
tough one for a country, but I think if we don't address it,
health care costs are just going to keep going up. One of my
concerns, just look at obesity. One of the most powerful lobbyist
groups in Washington is the sugar industry. I think we're going
to need some help from Washington, but I don't think they'll be
able to do it entirely. They're going to have to have a coalition
of government, health care providers, educators, food providers
and food manufacturers.

We have to do the same thing for obesity that we did for smoking,
but it took us 50 years for smoking. We can't afford to do that —
we have to have it happen and we have to raise the consciousness
about the epidemic of this disease.

I think the most important thing you have to do is communicate.
One of the things I read about Jack Welch, he said when he became
the head of GE he grabbed
the microphone. And I grabbed the microphone right after I became
CEO. I probably spent half of my time talking to people. I think
when people begin to understand the issues they're more willing
to change.

Four times a year we have what we call Connections that I
televise to all of our locations and talk to them for an hour
about all of the issues. The second thing that we do is that
we've doubled the number of staff meetings we have a year for
docs to come and hear the message. Then I go and I meet with each
institute, I do one a week, I go to each one of our locations
once a month, we blog, we have weekly papers, we take every
opportunity we can.

I think part of my obligation as a CEO is to talk about the
Cleveland Clinic outside and talk to the people at the Cleveland
Clinic about what's going on in the rest of the world. There is a
unique opportunity for a CEO to bridge that gap of communication
back and forth. When people understand what the forces are,
they're more willing to change. If you talk to them and if you
listen to them about their concerns and address them in a very
straightforward manner and don't try and B.S. them, then they are
much more responsive. I think that communication is vital and you
can't do it enough, it's amazing.